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Monetary Policies, Oil Prices And Geopolitics
Oil Staining the Faith, and the Strains of the Faith in Oil

Sebastião Buck Tocalino
August 30, 2014

  • For a nation without strong democratic institutions and traditions, its petroleum may come as a political, social and cultural curse.
  • With oil flowing out of the ground and being exported at a high market price, fiscally free governments may neglect their own people.
  • The continuous drop in US gasoline sales (a very significant share of global oil demand) since 2007 was not accompanied by lower oil prices.
  • Negative real interest rates and a money-printing extravaganza inflated oil prices even amid a several-year-long global economic slowdown.
  • If the moral hazard from extreme central bank policies was already controversial, monetary tampering has now far more disturbing geopolitical consequences.
  • We were shocked by the savage execution of James Foley in the Middle East. This cowardly brutal murder reminded us of Daniel Pearl, another American journalist killed in 2002, in Pakistan.

    These men were not unscrupulous politicians or opportunistic leaders, and not even armed partakers in any combat. They were reporters, uncommon only in their courage and efforts to heal and call our attention to the political, cultural and physical violence that is taking place over there.

    The map below was published by the international organization Reporters Without Borders. Countries were colored according to their local freedom for gathering and providing information.

    Freedom of Information Map
    (click on map to enlarge)

    Not surprisingly, countries where reporters find greater difficulties have serious democratic problems. But it is also interesting to note that many of these economies depend heavily on their exports of nonrenewable geological resources - especially oil and natural gas.

    Over the years, as fossil fuels brought more economic power to governments of these countries, its effect on individual and democratic freedom, as well as cultural tolerance, has been disastrous. The problem is not limited to any specific ethnic or religious origin. The inverse relationship between oil prices and the course of democratic institutions or cultural freedom maybe witnessed even in Latin America.

    With 6% of the world's proven oil reserves, Venezuela is not a Muslim country. But, instead of achieving progress with the higher value of its exported natural resources, Venezuela has become a pathetic example of political arrogance, authoritarian populism and institutional decadence.

    Proven Petroleum Reserves 2003

    According to figures for 1995 from the World Bank, Venezuela was listed as number 14 in a ranking of the 25 most oil-reliant states in the world. Oil reliance was measured by the value of fuel-based exports divided by GDP. Colombia, another Latin American country in the list, was featured as number 25 (source: "Does Oil Hinder Democracy?"). These two are the only South-American countries shown in red (with a difficult situation status) in the Freedom-of-Information map above.

    The nature of the problem has a lot more to do with economic and political power, than any religious or ethnic background. We better reevaluate any immediate stereotypes regarding religion and race.

    Before we continue to the economic and political issues, let us open a parenthesis here for some cultural retrospect.

    Arab culture was actually very rich and important in the past. Centuries ago, they contributed to the sciences of mathematics, physics and astronomy. In Western Europe, they introduced the astrolabe. And it is not just a coincidence that the important discoveries of America (West Indies) and Brazil were respectively made by Spanish and Portuguese ships. The Arab influence on those cultures was strong. Check out the book "The House of Wisdom: How the Arabs Transformed Western Civilization" by Jonathan Lyons (the same author of "The Society for Useful Knowledge: How Benjamin Franklin and Friends Brought the Enlightenment to America").

    The Quran and Muhammad talked about racial equality and justice, as in The Farewell Sermon. Islamic Prophet Muhammad's famous Final Sermon was delivered on the 9th of Dhu al-Hijjah, 10 AH (9 March 632) in the Uranah valley of Mount Arafat, during the Islamic pilgrimage of Hajj. Tribal and nationalistic differences were discouraged.

    The Umayyad Caliphate started with Mu'awiyya ibn Abi Sufyan, at the end of the First Muslim Civil War (or the Great Fitna due to the assassination of Uthman ibn Affan by Egyptian rebels in 656). That war resulted in the overthrowing of the Rashidun caliphs and the establishment of the Umayyad dynasty in 661 (twenty nine years after the death of Prophet Muhammad in 632). A treaty acknowledged the rule of Mu'awiyya as the first Umayyad caliph. The Umayyads continued the Muslim conquests, incorporating the Caucasus, Transoxiana, Sindh, the Maghreb and the Iberian Peninsula (Al-Andalus) into the Muslim world. At its greatest extent, the Umayyad Caliphate covered 5.79 million square miles (15,000,000 km2), making it the largest empire the world had yet seen, and the fifth largest ever to exist. The non-Muslim population had autonomy; their judicial matters were dealt with in accordance with their own laws and by their own religious heads or their appointees, although they did pay a poll tax for policing to the central state.

    Arab Empire

    The Jewish Virtual Library website says that the Umayyads "also embodied fully the Arabic virtue of hilm, or leniency, and generously forgave even some of their worst enemies. That forgiveness and leniency is what helped to establish the new administrative structure the Umayyads were building."

    The golden age of Jewish culture in Spain started with the Muslim conquest of the Iberian Peninsula in the 8th Century. A branch of the Umayyad family, weakened by the Third Muslim Civil War of 744-747 CE, fled across North Africa to Al-Andalus, where they established the Caliphate of Córdoba, which lasted until 1031. Tolerance, colaboration and peaceful coexistence between Muslims, Christians and Jews were the strongest characteristics of that historical period.

    In "Adventures in History", Jerônimo Teixeira explains that the Quran (or Koran - Islam's sacred book) made generous mentions towards other book followers, referring to the other two monotheist religions based on literary works - the Jews with their Torah and the Christians with their Gospels. God (or Allah), through the Islamic Prophet Muhammad, taught respect and religious freedom for the Jewish and Christian people living in Islamic territories. In ancient times, when the Umayyad dynasty governed Syria, they followed these Islamic precepts very respectfully. These were good news, especially for the Jews, a people who under European Visigoth dominance could not enjoy much freedom. The Islamic dominance of the Iberian Peninsula in the west of Europe from the 8th to the 11th century started an age of unprecedented liberty and collaboration among Muslims, Christians and Jews. The Jewish population not only grew in numbers, but also in importance during the Muslim government. This was so obvious that Abd al-Rahman III, the Arab leader between years 912 and 961, appointed a Jew as his vizier (something like a prime-minister).

    It was also thanks to the Arabs, collecting and translating books from different places and different cultures, that many ancient literary works (including Greek philosophy) were not lost forever. We should remember that, in the past, European religious authorities also showed a very intolerant attitude towards different views and cultures, burning and destroying books and people who they considered a threat to their own faith and power. The Inquisition was another version of violent terrorism back then.

    Hieronymus Bosch paints religious terror

    The impressive paintings of Hieronymus Bosch were influenced by events of religious oppression and fear in Europe.

    Even in some areas of the United States of mid 20th century, radical groups (who considered themselves religious) gathered together under the costumes of the Ku Klux Klan to incite segregation and violence against minorities from other creeds and races.

    In the 1970s, once more, so called religious radicals attacked and bombed some abortion clinics licensed by the American government. They also used physical violence and threats against doctors, employees and patients of those clinics.

    Terrorism by Ku Klux Klan in the USA

    This rather unpleasant but indispensable retrospect just reminds us that the Islamic faith, in its original and intrinsic form, wouldn't have anything to do with the ominous intolerance and brutality that we have been witnessing. Just like the essential faith and beliefs of the majority of (Catholic and Protestant) Christians must not be blamed for any disfigured aberrations and behaviors of groups that may have been associated with their past. Much to the disgrace of any spiritual values, these are just some examples of ill-intended usurpations or exploitations of the words faith and religion by some reckless people.

    Extremist Islamic groups and terrorists do not represent the Muslim religion, just like the Inquisition and the Ku Klux Klan have never really represented true Christianity.

    Religion is often a highly emotional topic, difficult to be approached without any unbiased views. By definition, faith does not allow itself to be questioned by reason and intellectual argument. This makes matters complicated. If faith cannot be questioned, then it may become a very coveted ally for some opportunists seeking power and influence. Once faith is claimed to back their views, groups of (economic and political) interest aim to become unquestionable themselves. So, very unfortunately, at times a religion may get slowly manipulated, radically reinterpreted and then recklessly misused as a scapegoat to promote some malicious ideas that have NOTHING to do with any original and true spiritual goal of the soul.

    In historical terms, cultural intolerance cannot be isolated under any single faith or religious denomination. Like many ancient pagan creeds, big monotheistic religions have also fallen prey to ill interpretations, misguidance and indeed atrocious distortions.

    But let us move on to the actual economic and political issues.

    When governments find themselves enriched by local geological resources, instead of the work and entrepreneurship of its people, they cease to be financially dependent on the population. If fiscal freedom (with no or little income tax imposed on the people) may seem like a blessing at first glance, it may turn into a curse. Like a tumor that grows as the state neglects the importance of a good education system, professional qualification of its people and the technological advancement and diversification of the economy. If these governments do not collect much in the form of tax from their population, it also does not allow them to criticize or demand much in return. Administrative transparency is impaired.

    Petroleum profits: Fiscal Freedom but Institutional Problems

    With black gold flowing out of the ground and being exported at a high market price, governments become fiscally free from the people. Not being a source of income for political leaders, these populations may be seen more as an inconvenience. The less educated the population, the less they will question the government and the harder it will be for them to organize any successful popular opposition. Therefore, instead of promoting good quality education, the state may prioritize expenditures in repressive measures to secure its economic and political power.

    Part of that oil money is also spent on subsidies, buying complicity from different groups. Without investing in quality education, cultural development and popular engagement in the economy, these governments also erode entrepreneurship, softening it with subsidies. The cumulative long term effects of these policies are very problematic.

    Oil Staining the Faith

    Financial support for religious groups may be seen as an easy way for the political leaderships to buy popular complacency. But faith may become dangerously contaminated by social frustrations when not accompanied by cultural and institutional progress. Once it is tooled to promote subversive intentions and ill spirits in men, women and children, its paradoxically destructive potential emerges.

    The economic blessings of these governments, graced by higher oil prices, have not generated much institutional improvements, nor more democratic rights and cultural tolerance.

    The charts below show us how oil is employed in the world and in the USA:

    Petroleum Use: World and USA

    It is clear that most of it is destined to transportation. From what I gathered, with data regarding the year 2005, 43.4% of that year's total US oil consumption was refined as gasoline fuel. Other 23.5% was used in the production of distillate fuel oils (home and ambient heating oil, as well as diesel for motor engines, rail engines, agricultural machineries and electric power generation). Kerosene-type jet fuel for turbine-engine aircrafts used up 9.2% of the oil demand. (source:

    US oil demand is particularly relevant since, by far, the country is the number one consumer of this commodity in the world. Per capita consumption in the USA is 8.5 times bigger than in China, the second greatest consumer of oil in the globe.

    Petroleum Consumption by Countries in 2013

    Indeed, gasoline consumption in the USA has an important impact on the total international demand for oil. And US gasoline sales have reached its peak in 2005. A 12-month moving average allows us a better view of sales volumes by discarding most of the distracting volatility. We can see that sales stabilized from 2005 to 2007. Nine months before the collapse of Lehman Brothers (in September 2008), sales volume were already contracting. From its 2005 peak to current levels (published August 2014), gasoline sales have shrunk 8.8%, taking us back to the same levels of March 1998 - 16 years and 5 months ago! In spite of that, we have seen an uptrend in oil prices.

    Petroleum Prices x Gasoline Sales (1986-2014-08)
    Current oil barrel prices are US$ 97.86 for WTI in the U.S. and US$ 101.12 for Brent in Europe (August 29, 2014)

    But if not corroborated by the fundamentals, how does oil find support at these price levels for so long?

    One explanation could be that reserves are becoming scarce more rapidly than consensus had predicted. But that is not my belief yet.

    Let us take a brief look back at the US economic policies in the 21st century: After the technology stocks bubble burst in the year 2000, when the oil barrel was priced around US$ 30, the Federal Reserve lowered interest rates to promote liquidity in the economy. Some of the major effects of this move were the acceleration of speculative real-estate deals and the rise of oil prices. House prices soon proved unreal and started to collapse in 2006. Foreseeing further efforts of the Federal Reserve to provide liquidity in the aftermath of the real-estate bubble, investors and speculators started moving money onto the oil market. This has caused an increase in oil prices, despite the global economic slowdown.

    Though not intentionally, the monetary policies of the Federal Reserve (and other important but less influential central banks around the globe) have had an undeniable effect in raising the prices of fossil fuels. Indirectly, this also contributed to an institutional and social deterioration in several nations. The rising prices of food (agricultural commodities that depend on oil-derived fertilizers and transportation fuel costs) helped to spread even more discontentment among people. And higher prices of oil provided more funding for governments that systematically neglect their population's best interests, as well as their own long term sustainability.

    The Strains of the Faith in Oil Prices

    Decades ago, the Soviet Union was a perfect example of an increasingly deficient political administration funded by its exports of geological resources. Today, Vladimir Putin's Russia is again arrogantly gambling on international foreign policies leveraged by its fossil fuel exports. But Moscow should have already learned (through its own history) that betting on high energy prices can be a very risky business. In the past, oil prices went down and stayed down for a prolonged period. The USSR showed itself unsustainable from then on.

    Pushed by the oil crisis of the 1970s, the barrel of oil was priced at US$ 39 in 1980. At the end of 1985 it had already fallen to US$ 30. But in 1986 it rapidly collapsed to US$ 13. In spite of oil prices averaging US$ 20 from 1987 to 1991, the Soviet Union (with so much inefficiency and corruption) could not fund itself at that level. The communist administration had made their bets on oil prices moving higher. That wrong bet turned out to be the bankruptcy of the Soviet administration and their communist regime in 1991.

    Petroleum - FedFunds - USSR

    There are alarming problems escalating in the Middle East, North Africa and Eurasia. Potential political problems between China and Japan seem to be also based on a dispute of islands with oil promises. Even Scotland is considering more seriously its independence from the United Kingdom - partly due to the North Sea oil explorations and its (short sighted?) economic potential... At the root of many disputes, we can find some faith in higher energy prices. Again, these expectations for continued oil inflation seem to thrive even amid this serious and several-year-long global economic slowdown. It would be very naive not to recognize that central bank policies, with all their negative real interest rates and a money-printing extravaganza, did not have any pernicious contribution to the situation. Terrorism is just the uttermost violent, unforgivable and deplorable act that ultimately shocks us all.

    If the moral hazard of these extreme economic central bank policies has always been a controversial matter, the geopolitical side effects of monetary tampering now seem to reach a far more disturbing magnitude.

    Will the FED give up its pitch on ending QE? I don't think so. But I do not believe they can afford to raise nominal interest rates. Not for quite some time. That would only make heavier the already huge burden of public debt. And, in my view, the economy has not reached escape velocity yet. Without QE pushing inflation, interest rates would only continue to be negative in real terms (thus providing liquidity for speculative trades such as in the oil market) if inflation does not fall flat on its face again! If inflation moves lower, fearful global investors may still run for refuge in US Treasury Bonds (driving lower the long end of the yield curve). In a virtual or simulated environment it would be interesting to see all the possible routes and outcomes of this estranged economy, but in the real world these experiments that central banks have embarked on will probably bring out some gloomier outcomes yet, no matter what choices are made from now on. But I guess this time they will just have to let some of the hot air out of these bloated commodities and stock markets!

    Dedicated to the memory of James Foley.
    James Foley 1973-2014


    Ordinarily, we tend to tell ourselves that there is nothing we can do against the aggravations of terrorism, geopolitical deterioration and the acceleration of climatic changes. It all seems to escape our range of action. This provides us some emotional detachment and an alibi that conveniently frees us from any sentiment of complicity. But, in fact, our daily choices and lifestyles are part of the whole picture. It is very common now for people (singles or couples) to buy and drive SUVs (Sport Utility Vehicles) downtown or in the suburbs. Luxury, eye-catching looks and comfort are the qualities that most frequently sell these vehicles, not any real need for a four-wheel drive fuel-gobbler off-road means of transportation. But the routine social and urban use of these fashionable vehicles serves to show the low level of personal engagement in our culture. By consuming more fuel, their negative impact is worse on the issues of environmental pollution, climatic deterioration, oil-lobby activism, terrorism funding and international geopolitics. In the US, there is already a bumper sticker campaign trying to encourage greater awareness and personal involvement. Here are some examples of the bumper stickers used:

    bumper stickers against petropolitics
    Our personal choices and attitudes make a difference! Important changes begin at an individual level!


    Copyright © Sebastião Buck Tocalino - All rights reserved.

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